Price systems for markets with transaction costs and control problems for some finance problems

Tzuu-Shuh Chiang, Shang-Yuan Shiu and Shuenn-Jyi Sheu

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Abstract: In a market with transaction costs, the price of a derivative can be expressed in terms of (preconsistent) price systems (after Kusuoka (1995)). In this paper, we consider a market with binomial model for stock price and discuss how to generate the price systems. From this, the price formula of a derivative can be reformulated as a stochastic control problem. Then the dynamic programming approach can be used to calculate the price. We also discuss optimization of expected utility using price systems.

Date: 2007-02
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Published in IMS Lecture Notes Monograph Series 2006, Vol. 52, 257-271

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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:math/0702828

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